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Why I Will NOT Buy or Sell that First Big Move

In the game of trading there is always a rush to be the first one in or out, state it in real time and then wait to take a victory lap. It's great fun and an ego stroke to be able to 'call that shot', whether it's a bottom or top. Yet, these decisions are often impulsive and without much thought. When a stock plunges for whatever reason it may seem appropriate to stick your hand in and take a slice or even a big chunk, without ever understanding the technical damage that could be taking place. On the flip side, a stock that is rising may be a good pickup but we have seen more fakeouts lately that have burned those buyers. In addition, shorting/selling a breakout may also be premature.

For me, I will wait for confirmation of the move FIRST, accompanied by the indicators that give me more conviction and higher probability odds. I don't need to be the first one in as it may be far to early. You see, the first move down is driven by panic and is hardly ever the only selling that occurs. We see shocks and then after shocks when reality strikes. Likewise, a breakout should be followed by some commitment or conviction that buyers are serious about more upside to come. Now, I will usually be late to the party and I'm 'okay' with that, know that if a new trend is taking place I will have plenty of time/room to get on board, and if a range is just being established then I can very easily separate from the trade with minimal damage.

We have had some recent examples where waiting for that confirmation paid off. Last week, Twitter (TWTR) posted some disappointing earnings (actually released 45 mins early into the trading day) Tuesday 4/28 and plunged, yet many were out there 'grabbing it' in the low 40's (some notable pundits expressed their actions in the media), willing to take advantage of this absurd selloff. While it may have been absurd, it was surely not finished as the stock continued to go lower and reached depths Friday not seen since January (see chart).

In a flash, the 46% gains YTD were wiped out, but those buyers in the low 40's are now under water by at least 10%. Oh sure, the stock will bounce at some time, but are we about waiting for it to bounce just to get to breakeven? Of course not, we are about making money, and just a bit of pause and waiting for the next day (which was lower) would have saved the rushed buyer from a losing trade. Oh, I suppose Twitter won't be down this low (high 30's) for too much longer, but point being if the jumpy buyer exercised some patience they would not be in the hole.

We had our eye this past week on Chesapeake Energy (CHK) with some robust volume and strong option flow. Much of that was concentrated Tuesday and Wednesday yet it did NOT confirm a price breakout until Thursday and Friday. I entered option positions on 4/30 (bought July 15 calls) as the stock showed some great relative strength in a weak tape, and Friday's rally confirmed the bull trend is in place (see chart). Waiting for the price confirmation and turn in technicals gave me added confidence this trade would work out (so far we are up 35% in this trade in just under two days).

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